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Drilling down into Kroger's store sale

Data: Kroger; Map: Kavya Beheraj/Axios

At the center of grocery chain Kroger's attempt to get its acquisition of rival Albertsons past regulators is a Spinco, a separate publicly traded company that will absorb between 100 to 375 locations.

  • While the Spinco is capped at 375 stores, according to the merger agreement, Kroger and Albertsons have said they are willing to divest up to 650 stores.

Why it matters: This will be a long negotiation and regulatory review, reconciling the number of stores the Federal Trade Commission asks Kroger and Albertsons to divest.

What they're saying: Two sources familiar with the situation say the merger agreement details are the first step toward negotiating a deal with the FTC on the number of stores that may need to be divested and how they are to be separated.

  • While the merger agreement limits the number of stores the Spinco can assume, the total number of locations Kroger and Albertsons are willing to part with may be flexible, an industry source says.
  • Hence the discrepancy between the 375 cap on the Spinco and the up to 650 stores there is a willingness to part with, the source says.
  • It really hinges on how the FTC weighs in on the deal, which remains unknown at this early stage, the source says.
  • The acquirer's CEO Rodney McMullen has told investors he is highly confident in getting approval.
  • Get comfortable, a third source says, because this deal won't close until 2024.

Details: The transaction will take into account the economic viability of stores to be spun off, to ensure they are at a high enough concentration to support, for example, a warehouse.

  • It won't be a matter of Kroger spinning off two stores in Texas that then go out of business in two years, a second source familiar with the situation says.

What we're watching: What is the number of stores if asked to divest, at which the deal begins to not make financial sense for Kroger or Albertsons?

State of play: Regulators view each deal on its own merits and history is not always the best guide, the industry source notes.

  • Whole Foods' first attempt to buy rival Wild Oats was blocked by regulators, only to then get clearance two years later.
  • Dollar General made a play for Family Dollar, arguing key competitors included Walmart (sound familiar) only to run into resistance.
  • On the other hand, Dollar Tree succeeded in purchasing Family Dollar.
  • It all depends on how regulators define the market.

Yes, but: Whole Foods and Dollar General were strictly viewed as competing within the specific segments of organic and dollar, respectively, rather than food retail more broadly.

The intrigue: Politics play a significant factor after President Biden called on regulators earlier this year to more closely scrutinize transactions.

  • If Office Depot parent ODP had pursued its deal with Staples (this would have been their second attempt), it might have provided more insight into regulators' mindset under the Biden administration's aegis.
  • Courts, however, have stepped in to give deals the green light, trumping antitrust regulators, as colleague Dan Primack reported.
  • Food, especially in a time of inflation, is always going to be a politically fraught issue.

The bottom line: While the Spinco was formulated as a kind of backstop to give Kroger and Albertsons shareholders some assurance the deal could get approval, the preference, of course, is to sell the stores to competitors and not have to proceed with the Spinco at all, the second source says.

The Federal Trade Commission and Kroger did not respond to requests for comments.

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